Why Europe Matters… And How Spain Could Wipe Out Your 401(k)

Many people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?”

The short answer is that everyone should care about Spain. Spain could potentially take down the banking system in Europe, which would mean the US facing a Financial Crisis at least on par with 2008.

How would this unfold?

To understand this, you need to understand how the European banking system works. By now everyone knows that many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.

Well, when these countries issue debt, it is mainly the European banks that buy it. So let’s say Spain issues €5 billion in new debt. Most of that will be snatched up by Spanish banks or some other European financial entity.

This bank will then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk (I realize this sounds insane given how bad Spain’s finances are, but this is how the banking system’s “risk models” work).

The bank will then use this Spanish bond to backstop loans to Spanish businesses, developers (not so much any more) even student loans: pretty much every other type of loan the bank might make.

On top of this, the bank will also use this Spanish bond to backstop hundreds of billions of Euros worth of trades.

Do you see the problem with this? If Spain defaults, one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke. At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).

So what? Who cares? This is Spain’s problem right?

Wrong. This is Europe’s problem as European banks across the board are sitting on Spanish debt: Spain’s sovereign bond market is €2.1 trillion in size.

So if Spain defaults, then a heck of a lot of EU banks (and some US banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent. This in turn could spread like wildfire throughout Europe’s banking system.

This is why the Spanish bank bailout was so rapid (it took only one weekend). EU officials know that if Spain’s banking system goes down, most of Europe will as well. This is also why EU officials continue to give money to Greece despite the clear fact that Greece is completely and totally bankrupt and has failed to meet fiscal demands placed on it throughout the EU Crisis.

Indeed, I wager most people at some point have asked themselves, “what’s the big deal about Greece? It represents only 2% of the EU economy. How is it that a country this small is still an issue after TWO YEARS!?!”

Now you know. By some estimates, Greece’s true debt exposure is north of $1 trillion. Lehman brothers had $649 billion in assets when it collapsed. Can you imagine the impact that a $1 trillion vacuum would have on the EU’s banking system (a banking system which backstops well over €200 trillion in derivative trades by the way).

How would the debt implosion of Spain’s $2.2 trillion in sovereign bonds affect the financial system? What about the effect of Europe’s $46 TRILLION banking system collapsing?

It would be Lehman by a factor of ten, easily.

So what does this have to do with the US?

The US banking system is $12 trillion in size. And this backstops over $220 trillion in derivative trades. Of this $220 trillion, 85% are based on interest rates. So…

If Spain, or any of the other PIIGS default, and Europe’s banking system (which is $46 trillion in size by the way) crumbles, interest rates across Europe will spike as the EU sovereign crisis spreads.

At the same time, Treasuries will spike pushing interest rates close to ZERO in the US, if not into negative territory (this happened when Lehman went under).

This in turn would very likely trigger an implosion of all those derivative trades based on interest rates. This blows up Wall Street and likely results in bank holidays and the stock market even being closed down for a period.

This is why Europe matters. This is why Spain could wipe out your 401(K). This is why European leaders are so frantic NOT to let a default occur in Greece or Spain (remember, the Spanish bailout was rushed through in less than a weekend).

In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.

This is why I keep talking about Europe so much. And it’s why I’m more concerned now than I was in early 2008. No joke. What’s coming will be truly horrific. I believe we have, at most, maybe 9-10 months to prepare for all of this (possibly less).

On that note, we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

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Good explaination. Now understand how it keeps going. Apart from that, I have learned that the employers of America are yet again matching employees' 401(k) contributions at a level not seen since 2005, before the economic crisis. I think, workers will benefit from this, but it could also mean more reluctance in hiring.

default (failure) is not an option. analysts, like yourself, are pretty sure the relationship between the German People, the Chancellor, and the ECB favors the groups in that order. the German people don't want to throw good money after bad, they push Merkels buttons, through Parliamentary political feedback, she must put down her American bazooka, impose austerity, and watch the EURO crumble. the German People think US stimulus is irresponsible. they also see the American political system is moribund and corrupt, every four years the powerful rig another election, buy both sides of the wheel, red and black and put their man in power. i just saw pictures of an anti Obama parade.

in America we all know the sheeple do what they are told, sooner or later. go ahead protest, at the end of the day they make the decisions, JUST LIKE 2008 when the American public was against TARP (for a few days anyway, somehow their minds were changed) and Americans have a difficult thinking Germans are really any different, (I mean check out the history book, Mein Fuhrer)

when Argentina went broke there were no bailouts (the IMF and global banking system, smiled and said you can go to hell and die) and they did, they actually defaulted on their bonds (held mostly by widows and orphans in Italy, but regional money (Carlos Slim) came in and bought up some businesses, and despite a collapse their economy recovered. the 2008 crash would have had similar results with or without TARP, EXCEPT a lot of rich bankers got to keep their assets.

so just look at Argentina, either way they were screwed, the worst case scenario created more real economic recovery, (despite the fact the rest of the industrial nations hate Argentina, sometimes it better to be hated and have a free market (and then make a mess of it yourself, understood) than to get coddled along like Greece with Papa Germany holding the purse strings)

as for US 401K and tanks in the street, bring em on. just like 2008, this time we're going for economic recovery, and not saving rick banksters.

I think Grahm is right about Germany not relenting this time. They're just buying time and pretending they're willing to help.

Italy is now resorting to emotional black mail, by calling them the Fourth Reich. I think this won't work and will make sure they won't relent, because they have already overcome the guilty associated with their Nazi past and WWII defeat. This is also a great opportunity for them to show the non-Germanic Europe that Hitler was somewhat right about their superiority, I think. The emotional black mail this time is very likely to back fire.

" This is why I keep talking about Europe so much. And it’s why I’m more concerned now than I was in early 2008. No joke. What’s coming will be truly horrific. I believe we have, at most, maybe 9-10 months to prepare for all of this (possibly less)."

LOLOLOLOL!!!!!!!!!

Ok ... so, no collapse by the end of this [Graham] Summer.

Whew!

Relax everyone, the end of the world has been postponed .......... again. :D

Anyone on here who has read your pieces, sorry, adverts, will I am sure already have made sure his money is secure in PM's and out of the reaches of exploding banks anyway.....and if you haven't..... gold bitchez quick!!

If I said it once, I said it a thousand times, the Federal Reserve will backstop the ECB and prevent a systemetic failure of epic proportions, until the world stops using USD as a reserve currency. When that happens, well, that's why there's gold (silver) bitchez.

'nuff said, go back to smoking that phatty; we're all good here until the next world war, and by then who gives a rip.

I totally agree, they will backstop but I think they will be to late. Since they haven't did it yet and are hoping for the ECB to figure it out, if in the process of figuring it out the system collapse and then the US can't bailout because it's to big and out in the open.

But it's maybe not so bad to link to a newsletter on ZH, but IF it's done with class ...the way it's done, and the lack of anything 'fresh' in the lead-in article, are the problems with Phoenix Capital.

For example, when Ilene posts articles from Phil's Stock World - who also has an investment newsletter - Phil is fun to read and typically has some real things to say ... he even sometimes gives away a trading idea or two ... and then there is a low-key sentence at the bottom introducing his website and newsletter. Phil does it in such a classy way it doesn't bother anyone, and his articles are often worth reading and funny as well.

Graham, though, is really a 'summariser', as are several other ZH contributors at times ... Graham doesn't present much new to anyone who follows ZH, and his sales pitch is over-selling ...ZH is definitely the wrong place for that.

But in terms of over-selling on ZeroHedge, Reggie Middleton is actually worse than Graham, though Reggie is better in the respect of providing a little bit of fresh content. Tho Reggie's content is also often aborted, he has a catchy headline and a few sentences and then tells you his real 'meat' is for his subscribers.

But much more than Graham, Reggie is nearly always thumping his chest and boasting about himself and how right he is/was, like a stereotype of some American used car salesman. Reggie is more annoying with his 100 links to his own stuff and the non-stop boasting, but Graham catches more sh*t somehow.

Indeed. If Summers didn't hawk his newsletter in all of his posts I could use them to warn friends and family about the coming monetary collapse. I guess folks in the USA expect people to peddle their commercial services in any advice they offer but over here in Europe people are highly sceptical of financial shills (unfortunately they do trust government officials too much, which I guess is the opposite in the US).

you said: I believe we have, at most, maybe 9-10 months to prepare for all of this (possibly less).

but earlier this year you predicted an implosion by 'the end of Summer'....why the reprieve?

I want to see how the Sept bond/ bund/ bill/ and note auctions go....if we make it through those I might agree on the 9 months..

PS NEVER put a timing on your predictions, they will always be wrong....try the helping words like 'someday' and 'eventually' and even 'inevitably' stay away from precise terms like 'in nine months' or 'end of Summer' with a tiny bit of effort you will sound like Edgar Cayce and Nostradamus in a few quickly passing eons.

The ECB hasn't allowed any EZ banks to fail. Not even one. With their entire overleveraged Eurosystem at stake, there is no reason to think they will change their tune and allow any banks to fail. There is only one way that Euro puppy goes down - political failure. If a significant state (other than Greece) leaves the Euro, that is the end. They won't be able to contain that. This is why TPTB can't allow democracy to reassert itself in the EuroZone. If the people rose up, they might just shoot the puppy.

OK, Graham, we would like more facts and analysis other than "it's coming! it's coming! it's coming!". It sounds as if you're having a shot at ZH readers. :) That's why for precaution I use this pack on my head, just in case you come.

"If Spain defaults"...."If Spain defaults" blah blah blah....blah blah. They won't default as long as these central bankers can keep printing. Obviously for much longer than we thought. As far as everything else .....It's all BULLSHIT!

never any refrences cited. #1 sign of a plagarist. we dont have pop up adds on Zerohizzles but we do have good old phoenix capital. looks like he got his monthly newsletter thumping minions to down arrow his detractors now. Look out!

Yes, we know TPTB will take us down on the sinking ship, right along with them, should anyone like Spain or Italy default. (The world must consider mass default or a major debt forgiveness.) But do you want to be held hostage by these motherfuckers your whole life? What about the lives of your kids and grandkids?

Isn't it time the people who use sovereign debt, like Spanish bonds, as collateral LOSE EVERYTHING?

More of Graham's "Chicken Little Routine" which he has been spewing out since 666 back in 2009. Listen to my warning and then be SURE to subscribe to my newsletter which has been wrong for four years. When every CB on the planet is diluting/debasing/devaluing their currencies, you have to be SHORT cash and long "stuff". Whatever happens to Spain will result in trashed currencies, so short "fiat" by spending it as fast as you can - gold, silver, corn, timber, fresh water, - anything but CASH, except for monthly expenses and emergency "escape" cash.

I think while repetitive, and stymied by the ever more unbelievable shuck and jive drivel that the ECB, Fed and other central banks spew in their endless attempt to keep the ponzi going, Summers will be proved correct. The math says so.

I could probably write these articles myself and I was a Psychology major. What is the least I would have to do to become a financial advisor? Can I just pass the broker exam and start doing it, or do I have to go back to college for 2 years and get a slack-ass MBA first?

The hardest part about getting a Pysch degree is learning how to spell Psychology. Did you get a trophy too? Seriously, if you don't think Europe is a monster about to reek havoc on our shore's you're not paying attention. The market activity lately cannot handle the stress of Europe imploding without ending in a complete algo driven bidless free fall. BTW, I hate the fact that every post is essentially another ad.

I would be more worried about TD Ameritrade using Knight and Morgan Stanley pumping their retirement accounts with FB stock if we are going to talk about retirement accounts. Spain will be bailed out, economic policy decrees it.

So basically what Graham is saying is that you can't make any money betting on Europe/Spain to fail because the Fed will be buying EUR stocks and bonds to pump up the market just like it did in the US.

Every day there's a new post from Graham about how it's all doomed (typically just a rehash of other, better articles from other, better commentators)...

...followed by a plug for the same old newsletter that will tell EXACTLY how it will all play out and what the solution is.

That newsletter must be one hell of a document - a veritable panacea, it seems, although it might also be a load of garbage endlessly touted by a stinking shill snake-oil salesman. After reading his contributions on ZH, I can't bring myself to download it to find out.